Wednesday, December 23, 2009


China property market has now become a bubble. This is now turned into a fear which is expected to burst and shake the world economic recovery in the coming days. But now we can be relaxed to a certain degree that China have recognized this rising dragon and is making polices to control the dragon.

China has developed new reforms to control the dragon of bubble which took birth from real estate property prices. Its new policies are quite capable to control the dragon but much depends on the real figures that will come up in the coming quarters in China economy. The prices of home in 70 major Chinese cities rose 5.7% from a year earlier in November, the fastest pace in 16 months. The property market was a prime driver of the economy's 8.9% growth in the third quarter.
The below chart shows the price chart of chinese real estate.

The biggest house price rises are coming from the main cities of Beijing, Shanghai and Shenzhen. The investment in this sector is also the highest among all other sectors in china. In china the property investments alone accounts for about 12% of China GDP. Higher amount of investments have also resulted to a series of apartment projects being developed by companies such as China Overseas and China Vanke will likely be completed next year. Some developers have also resumed their projects this year after putting them on hold for months during the global economic downturn.
The demand for residential properties was already rising rapidly by March 2009. In that month housing sales were up by 36% on a year earlier. Even in 2007 the residential property prices in China had soared. Home prices are likely to climb 15 per cent next year, spurring revenue growth for developers. This could boost the prices for some real estate shares by 30 and 50 per cent in the next six months

If we get in to the historical property prices of China we find that in 2001 and 2002 period china made easy policies for expansion of the market. They allowed foreigners to freely own properties in 2001 (2002 in Beijing).The government restricted ownership to resident foreigners who have worked, studied or lived in China for at least a year. The property can only be used for personal purposes and not for rental.
This policy in 2001 and 2002 has created the journey of boom phase of Chinese property market.

When we look into the present market there are number of factors which drive the price of property upward.
• Ample amount of liquidity and that also cheap money is deriving the investments in the real estate sector.

• Real estate investment jumped by 28.% on a yearly basis, topping 989 billion yuan ($130.7 billion) in the first six months, according to the NDRC

• The interest rate is rather low now

• Other asset classes are very prune to risky levels. Like gold equities and currency.

• During recession times the price of the properties came to record levels low. Residential property prices in Beijing slid by 2% (3.2% in real terms) in 2008.

• Shanghai house prices stagnated in this period in real terms. In nominal terms, prices rose by 2%.

• The government announced a CNY4 trillion (US$585 billion) stimulus package in November 2008, with allocations for housing and infrastructure projects, manufacturing, education, and industry.

• The property deed tax rate for first-time home buyers was reduced to 1% from 1.5% from January 2009 to December 2009, if the area of the residential property bought is less than 90 sq. m.

• Stamp duty and land value-added tax was waived for individuals purchasing residential properties from January 2009 to December 2009.

• If residential property is held for more than two years, the seller is exempted from the 5.5% business tax.

• Lending conditions were made cheap in recession times like the down-payment for mortgages of first-time buyers was lowered to 20%, and the floor interest rates for home loans was lowered to 70% of the benchmark lending rate.

• So once the recovery of the Chinese economy took place the surging growth in property market of china resulted to a bubble where supply went ahead of demand. Where prices soared to in the country’s 70 large and medium cities rose by 7.1% on a yearly basis.The below chart shows the interest rates that drived the cheap money to flow in this sector.

So now the china is laying down the ground work to control the dragon of property bubble. It introduced new policies to suck out the bubble without harming the economy.

A quick look at the policies:

• Developers must now make a 50% down payment while acquiring land.

• From January 1 sales tax on homes sold within two years of purchase has been imposed slashing the time period from five years.

• The taxable period on home sales to five years from date of purchase.

• The government would re-impose the 5.5% tax on sales of homes bought less than five years previously to discourage speculation.

So what it means for equity markets. In one word protection from the bubble which was about to burst out. Now we need to keep a tab on how much the real affect of the new policies will have on the real estate growth sector. China is also curbing other dragons of asset bubble in automobile, steel, cement sectors respectively. In my next article I will throw light on Indian real estate followed with Chinese new policies to control the dragon.

Tuesday, December 22, 2009


Indian steel industry-in a capsule.
This article is an continuation from the ASIAN STEEL INDUSTRY-SERIES 1 CHINA.

To read that part please click below.

If we look at India we find that historically the Indian steel industry entered into a new development stage from 2005–06, resulting in India becoming the 5th largest producer of steel globally.
• Producing about 55 million tonnes (MT) of steel a year, today India accounts for a little over 7% of the world's total production.

• Steel production reached 28.49 million tonne (MT) in April-September 2009. Further, India, which recorded production of 22.14 MT of steel during April-August 2009, is likely to emerge as the world's third largest steel producer in the current year.

• The National Steel Policy has fixed a target of taking steel production up to 110 MT by 2019–20. Nonetheless, with the current rate of ongoing green-field and brown-field projects, the Ministry of Steel has projected India's steel capacity is expected to touch 124.06 MT by 2011–12.

• India's steel consumption rose by 5.7% to 26.49 MT in the first six months of the current fiscal over the same period a year ago on account of improved demand from sectors like automobile and consumer durables.
The chart below shows the growth of India steel production.

Indian demand for steel consumption is increasing in the coming days. We get proof of the putting when we analyzed and found that steel players like JSW Steel and Essar Steel are increasing their focus on opening up more retail outlets pan India with growth in domestic demand. JSW Steel currently has 50 such steel retail outlets called JSW Shoppe and is targeting to increase it to 200 by March 2010. They expect at least 10-15%of their total production to be sold by their retail outlets. Huge flow of investments will happen in the coming days in the steel sector due to increasing trend of domestic consumption.
Investments in Indian steel industry.

Even if we look into the type of investments that have happened after recession in India we get very impressive an bullish outlook on the sector.

• According to the Investment Commission of India investments of over US$ 30 billion in steel are in the pipeline over the next 5 years.

• Very recently Tata Steel has raised US$ 500 for its expansion of Jamshedpur plant and overseas mining projects.

• Many Steel companies have committed US$ 122.50 million for setting up sponge iron units in Koppal and Bellary in Karnataka.

• Even SAIL have declared that they will invest US$ 724.12 million to set up a 4-million tonne per annum steel mill at its Bhilai Steel Plant.

• Uttam Galva Steel plans a capital expenditure of US$ 62.8 million-US$ 104.6 million over the next two years for setting up of a 60 MW power plant. The power plant will help reduce its production costs.

Fortune of steel prices in 2010.
• Steel prices are set to go up from January 2010 due to increase in raw material costs, like iron ore and metal scrap.
• Led by demand from China, prices of iron ore—the key raw material for pig iron—have gone up sharply over the past two months to $106 per tonne from almost $81-$82 per tonne.

• Coking coal prices have also gone up to $165-$170 per tonne from $128 per tonne as China imported more coking coal this year.
If we look into the distribution of iron ore inventories we find:
• According to a report by industry consultancy, this week, iron ore inventories at China's major ports rose by 830,000 tonnes to end at 66.75 million tonnes,

• While stockpiles of ore originating from Brazil increased by 180,000 tonnes to 19.1 million tonnes, and Indian ore rose by 830,000 tonnes at 13.18 million tonnes.

• Australian ore inventories fell by 480,000 tonnes to end at 21.95 million tonnes by the end of the week.

• Chinese iron ore prices remained steady, the average price of imported iron ore increased by 2.3%. Iron ore prices are 25.8% higher than December 2008.

So raw material prices followed with stringent position of inventories of iron ore steel prices are on the track of a  major jump of prices of raw materials.
In Indian and global context the raw material negotiations are slated to start in January and indications are that the increase in new contract prices could be between 10% and 30%. Last year, iron ore contract prices were sealed at $80 a tonne (Rs 3,742). Currently, spot iron prices in China are trading at $126 a tonne (Rs 5,893), an increase of 13.5 per cent in the past six months. Coking coal prices have increased to $186 (Rs 8,692) a tonne since May. Last year, contract prices were $129 (Rs 6,033) a tonne.
Industrial analysts see iron ore prices going up by about 10% to 20% next year on increasing demand as the world economy recovers. In the coming quarters steel sector is set to make a living in a Competitive Economy from an Easy economy that took birth from recession.2010 will be a period for steel industry where growth will be high along with huge wave of demand, but with many twist. Like wise RBI rate hikes which will push up the cost of borrowing , higher commodity prices and inventory position of iron ore. But among all these we are bullish on the steel industry in the log run with few hiccups in short term.


The world economic recovery has finally started taking new baby steps. This has lead to increase of demand of commodities. Infrastructure will be the prime reason for the recovery journey. This is the only sector which will lead the path of global economic recovery. When share views on infrastructure we get many sectors being clubbed to them. Banks, Cements, Steel, Capital Goods, Construction are the prime industries which are linked with infrastructure growth.

In this article I will bring out the future vision of steel sector. This sector is one of the most volatile among all the prime sectors. Steel is a sector which applies to every corner of our life. It’s not surrounded within a specified ambit. We all know that at the back of every economic growth there is a high presence of Steel. Its also a prime contributor to fiscal balance of an economy.
Chinese steel industry-wonderful performance and future control mechanism.
When Global Recession started its dance from November 2008 we find steel demand took a massive hit. But now the scenes are changed as global economy is coming out of the recession. As we all know that china is one of the largest producer of steel.

• In 2009 till date China's steel output has reached 472 million tonnes in the first ten months of this year, as global output rose to 982 million in the same period, World Steel Association figures show. Analysts expect China's year-end output to rise above 550 million tonnes.

• China's auto and shipbuilding industries may consume 15 million tons and 13 million tons of steel respectively.

• According to the secretary general of China Iron & Steel Association, China apparent steel consumption is predicted to rise by 120 million tonnes or 26% this year given the fast increasing steel productions, particular those of small and medium size mills.
This was all about the consumption and production of Chinese steel, where we find a huge pull up from the recession times and also it’s never ending journey of growth. Among all these we should also account that china is also running at over capacity bubble too in steel production which might shake the tomb of china steel. This overcapacity have also lead to growth of export and as well as antidumping.

• China has made a production of 472 million tones of steel out of which domestic consumption accounts 120 million tones.

• China steel export tumbled reflecting the dwindling global demand, with the net export of crude steel expected to hit zero, sharply compared with 47 million tonnes in 2008.

• Total capacity in China's steel industry hit 660 million tons by the end of 2008.

• By October, excess capacity in the sector had reached 200 million tons with another 58 million tons under construction, according to MIIT figures released on Oct 27.

• Long products take more proportion of the total steel products, which accounts for 65.6% of the YoY increased 75.38 million tonnes of steel products during January to October.

• Profit of 70 steel mills slumped 70.67%YoY and sheet and plate businesses.

• The rising capacity was accompanied by expanding investment in those sectors. Investment in the by 3.8 % year-on-year in the first 10 months.
This excess over capacity production will open to two options.1) Break down of the over capacity which will lead to free fall in the global steel prices and 2) Merger and Acquisition in Chinese steel industry. The Chinese government is very much concerned about this rising bubble. The Industrial Coordination Division under the National Development and Reform Commission (NDRC), the country's top economic planning body has said that along with NDRC would join with the MIIT and other government departments to strictly control overcapacity in some sectors.
The government documents IS expected to release soon some ploicies regarding industrial readjustment. Projects which are involving new capacity building or expansion in the steel industry would be refused approval and support by the government. If these steps are brought into shape then the rising bubble might consolidate and the save the economy from a major crisis.

In my next article you will find details about the future prospect of Indian steel industry. I have broken it since I want my readers to have a clear concept about the sector in gamut.

Saturday, December 19, 2009


Banking trouble never seems to end for the world. Even despite of pumping huge funds to bailout and buying up crisis lead bank mortgage assets the story still remains to be unfolding few funds more to be spent.

This time the number have taken a growth in European banks (ECB).European countries have been trying to hard to come out of the crisis of recession which have jeopardized theirs future economic growth.
• The total demand for European bank write downs has only increased in the last six months.
• At present the ECB have increased the limit of bank failure and toxic assets buy up to at €553 billion ($796.57 billion) for 2007 to 2010.
• The estimate, which is €65 billion more than what the central bank forecast just six months ago.
• The prime reasons for hike of this is that new real-estate problems and loan risks in central and eastern Europe.
• This simply depicts that the major world economies are still struggling and spending tax payers money to buy up the worst night mares of the economy.

In the month of June 2009 the ECB have estimated the that toxic assets and bank write down will eat up in total around $218 billion from the start of the financial turmoil to the end of 2010, while bad loans would account for another $431 billion -- a total of $649 billion, with an estimated $366 billion already announced. Now this figure is revised up for more write ups.

Now a question might come when this nightmare of toxic assets and bailout will come to an end. And last but not the least how this affect Indian market ?
•The ans to the first one is that this process of bailout and toxic assets buy up will end only when fresh new cases will not come up, when the European government designs some regulatory norms for the ECB. Other wise in the future loose ECB monetary policies will lead to burst out of financial time bombs.
• India will hardly get any affect from the rising ECB toxic assets and bailout in direct link up but when ever their will be burst out of these time bombs in the short term one will get knee jerk reactions from the market.
• But as this process of bank failures will rise in the future more pressure it will exert on the long term prospect of Europe and Us economy to revive back.
• Since we should not forget that U.S and U.K are the prime exporting countries of India and we are all convoluted internally where a pull at one end of the thread and pull up us too.

The UK has strong ties with India, and UK companies are well positioned to take advantage of this growing export and investment market. India's major trading partners are China, the US, the UAE, the UK, Japan and the EU. The exports during April 2007 were $12.31 billion up by 16% and import were $17.68 billion with an increase of 18.06% over the previous year.The image below shows the import figures of Europe.

So the rising bailout funds will exert tremendous pressure on the Indian economic growth in the comings days. The market which is flooded with cheap money might work against all these negative cues but in the later time India along with other Asian economies will have to face some hard times due these mounting deficits.

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